UAE Corporate Tax: A Practical Guide to Deductible Business Expenses (2025)

The introduction of the federal Corporate Income Tax (CIT) regime in the United Arab Emirates marks a shift in the country’s business landscape. From financial years beginning on or after 1 June 2023, companies are required to pay 9% on profits above AED 375,000, with income below that threshold not taxable, effectively functioning as a nil bracket. This change has placed greater importance on understanding how to manage taxable income effectively. One of the most efficient ways to do so is by identifying which expenses are deductible under the new rules. While the CIT Law provides clear principles, the details are nuanced, and businesses that master these rules can optimise their tax position while remaining fully compliant.

The guiding principle under Article 28 of the CIT Law is that an expense is deductible only if it is wholly and exclusively incurred for business purposes and is not of a capital nature. In other words, only business expenses are deductible for CIT purposes. Expenses should be accounted for on an accrual basis, meaning they are recognised in the year in which they are incurred, not when they are paid, except where the taxable person is a small business which can avail cash accounting.

Where an expense is partly business-related, only the portion used for business can be deducted. For instance, if a company pays for a subscription that serves both personal and professional purposes, only the business-related element could be claimed.

Categories of Deductible Expenses

1) Business-Related Operating Expenses

Most day-to-day operating expenses fall within the deductible category, provided they serve a genuine commercial purpose. Salaries, allowances and bonuses paid to employees are deductible, as are office rents, utility bills and telecommunications costs that keep the business running. Expenditure on office supplies and consumables, such as stationery and printing, qualifies as well.

Marketing and advertising campaigns, whether digital, print, or event-based, are also deductible to the extent they are designed to generate taxable income. Similarly, professional service fees for auditors, legal counsel, or tax advisers are recognised as valid deductions. Even travel and accommodation costs can be deducted when they are clearly linked to business, though taxpayers must retain detailed records of the purpose and beneficiaries of such expenses. Maintenance and repair of business assets are also deductible, provided it does not extend the asset’s useful life. Lastly, costs related to the training of employees and professional development are also deductible when linked to improving business performance.

2) Finance Costs

Interest payments on borrowings used for business purposes are generally deductible, This includes interest on bank loans, credit lines, finance leases and the profit component of Islamic financing. Though there are certain limitations:

• Net interest expenses, after offsetting taxable interest income, may only be deducted up to 30% of adjusted EBITDA. A safe-harbour rule allows the first AED 12 million of net interest expenses to be deducted in full.
• In addition, specific restrictions apply to related-party loans borrowed by taxable persons. If a loan from a related entity is used to finance dividends, share redemptions, or capital contributions, the interest on that loan cannot be deducted unless the taxpayer can demonstrate that the arrangement is commercially driven rather than tax-motivated. This ensures that financing structures are aligned with genuine business needs rather than aggressive tax planning.

3) Entertainment Expenses

Client entertainment and hospitality occupy a special category. These are deductible only up to 50% of the actual cost. The CIT Law recognises that client lunches, tickets to events, and similar expenses have a business purpose but also carry a personal benefit element. To support such deductions, companies must maintain detailed documentation specifying the business reason and identifying the individuals involved.

4) Charitable Contributions

The CIT regime also allows deductions for charitable contributions, but only when made to approved “Qualifying Public Benefit Entities”. Donations to other organisations, regardless of their merit, are not deductible. For businesses, this means verifying the recipient’s status before making contributions if they wish to obtain a tax benefit.

5) Depreciation and Amortisation

Capital expenditure is not immediately deductible. Instead, businesses claim relief through depreciation or amortisation over the asset’s useful life, following standard accounting standards and reflecting the economic reality of the asset. For example, a vehicle or a piece of equipment is not expensed in the year of purchase but gradually written down in line with its expected use.

6) Bad Debts

Another important category concerns bad debts. If income previously recognised as taxable becomes uncollectible, it may be written off and deducted from a tax point of view. This ensures that businesses are not taxed on income they ultimately never receive, provided proper evidence of irrecoverability is maintained.

7) Pre-Incorporation and Pre-Trading Expenses

Expenditure incurred before a company formally begins operations, such as registration fees, market research, or feasibility studies, may also be deductible if it satisfies the general conditions of being business-related and properly recorded. This provision acknowledges that significant investment is often made before revenue is generated.

8) Taxes and Unrecoverable VAT

While CIT itself is not deductible, other domestic taxes and unrecoverable VAT incurred wholly for business purposes are deductible. Recoverable VAT, for which input claims can be made in line with the UAE VAT legislation, does not qualify. This distinction underlines the importance of carefully reviewing VAT positions alongside corporate tax planning.

9) Net Operating Losses

One of the most valuable features of the UAE Corporate Tax regime is the treatment of net operating losses. These may be carried forward indefinitely and used to offset up to 75% of taxable income in future periods. Losses incurred before the introduction of the CIT regime or before an entity became a taxable person cannot be carried forward, but the rule provides a powerful mechanism for businesses with volatile or cyclical earnings to smooth their tax liabilities over time.

Compliance and Documentation

The ability to deduct expenses ultimately hinges on record-keeping. Businesses must retain invoices, contracts, and supporting evidence that substantiate the purpose of each expense. In related-party contexts, compliance with the arm’s-length principle is critical, and transfer pricing documentation, including master and local files, may be required. Companies that take compliance lightly, risk disallowance of deductions and potential penalties.

Conclusion

The UAE CIT regime has introduced a new level of complexity to the business environment, but also an opportunity for well-managed companies to optimise their tax position. By understanding the principles of deductibility and carefully documenting expenses, businesses can ensure that legitimate costs, whether salaries, professional fees, interest, or charitable donations, are used effectively to reduce taxable income. Staying up to date with Federal Tax Authority guidance and seeking advice from qualified professionals will be essential for maintaining compliance and maximising the benefits available under the law.

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